What is a carve out in real estate?

What Does "Carve Out" Mean in Real Estate?

A "carve-out" refers to a provision in a loan agreement that creates a personal guarantee or liability for the borrower, separate from the primary collateral of the loan, which is usually the property itself. Carve-outs are also known as "bad boy" clauses because they are triggered by specific actions of the borrower that are considered bad faith or misconduct, such as fraud, environmental contamination, or misappropriation of funds.

These provisions are designed to protect the lender by ensuring that the borrower or guarantor can be held personally liable for certain obligations if they engage in actions that could jeopardize the lender’s interest in the property or the repayment of the loan. Essentially, while the loan is typically non-recourse—meaning the lender's remedy for default is limited to foreclosure on the property—a carve-out creates exceptions where the borrower can be personally liable.

Carve-outs are common in commercial real estate transactions, particularly in financing and sale transactions. They delineate a clear boundary of actions that, if taken by the borrower, change the nature of the loan from non-recourse to recourse, thus exposing the borrower’s personal assets to potential claims by the lender.

Make real-time data your competitive advantage!

Schedule a demo below to see our multifamily analytics platform and APIs in action.